Atlantic Pacific Oil Co. of Montana v. Gas Development Co.

• Decision Date: 24 May 1937
• Docket Number: 7556.
• Citation: 69 P.2d 750,105 Mont. 1
• Parties: ATLANTIC PACIFIC OIL CO. OF MONTANA v. GAS DEVELOPMENT CO. et al.
• Court: Montana Supreme Court

69 P.2d 750

105 Mont. 1

ATLANTIC PACIFIC OIL CO. OF MONTANA v. GAS DEVELOPMENT CO. et al.

No. 7556.

Supreme Court of Montana

May 24, 1937

Rehearing Denied June 18, 1937.

Appeal from District Court, Fallon County; Stanley E. Felt, Judge.

Action by the Atlantic Pacific Oil Company of Montana against the Gas Development Company, a corporation, and others. Judgment for plaintiff, and defendants appeal.

Affirmed.

ANDERSON and STEWART, JJ., dissenting.

D. L O'Hern, of Miles City, and F. G. Huntington, of Billings for appellants.

R. G Wiggenhorn, of Billings, for respondent.

MORRIS Justice.

Plaintiff brought this action, in the nature of a suit to quiet title, seeking to have certain contracts relating to the production and recovery of oil and gas adjudged to be valid.

The case was tried before the court sitting without a jury. Findings of fact were proposed and requested by the plaintiff, and requested, but not proposed, findings were submitted on behalf of the defendants. The court made and filed findings of fact and conclusions, and thereafter both parties objected in writing to certain of the findings and conclusions. The findings and conclusions as made by the court were thereafter modified in conformity with some of the objections on behalf of the plaintiff. Judgment was thereupon entered in conformity with the findings and conclusions of law as thus made. The judgment awarded plaintiff the relief sought by it. The appeal is from the judgment. The facts in the case are in nowise in serious dispute.

Between December, 1926, and February, 1928, there were issued at one time or another oil and gas prospecting permits by the United States, four in number, one to each of four permittees whose identity is not important. These permits described lands located in what is referred to as the Baker-Glendive Gas Field. The total acreage in these permits was approximately 2,000 acres. The defendant John Wight secured an irrevocable power of attorney from each permittee authorizing him to contract with reference to these permits. Acting under such powers of attorney, Wight executed operating agreements upon each of these permits in the names and on behalf of each of the permittees, respectively, with Herbert Stokes. These agreements were subsequently ratified in writing by the permittees themselves. These operating agreements are the subject-matter of the controversy here in issue. They were identical except as to parties, dates, and descriptions. By their terms the permittee agreed that he had not assigned his permit or done any act which rendered it subject to cancellation; that he would upon request apply for extensions of time within which to comply with the permit, and that he would do no act which would invalidate the permit or render it subject to cancellation. The permittee granted to Stokes "the sole exclusive right to enter upon the lands described" in the permit, to prospect the same for oil and gas, to apply to the United States for a permit to drill the premises and cause the same to be drilled for oil and gas during the term for which the permit was granted or extended, "and in all things to comply with the rules and regulations which have been or which may be imposed by the Department of the Interior relative to the drilling of oil and or gas wells on public lands." Stokes agreed to pay the entire cost of all the drilling and to save the permittee harmless from any claim or demands arising out of the drilling of every name, nature or description, the drilling operations to be under his sole and exclusive control. Stokes agreed to pay the royalties due to the United States, and to pay a royalty to the permittee on the oil and gas produced and recovered of 7 1/2 per cent. where the royalty to the United States was 5 per cent., and all other lands a royalty of 2 1/2 per cent. The right was granted to Stokes to purchase all oil and gas produced and saved from the premises at the field prices.

Provision was made that assignments of royalty were not to be binding on Stokes unless he was furnished with a certified copy thereof. Stokes was accorded the right to use oil and gas for drilling operations without cost. He agreed that if oil or gas in commercial quantities was found, he would proceed with due diligence to develop the premises to the maximum production commensurate with the market conditions. The right was granted to Stokes to apply to the Department of the Interior in his own name for such lease or leases as he might be entitled to from the United States under his contract and permit, such leases to be subject to the reservations of royalty contained in the agreement. The contract provided that Stokes might, if he determined the premises were not suitable for the production of oil or gas in commercial quantities, at his election abandon the contract and surrender all rights thereunder upon giving written notice. Upon the failure of Stokes to keep and perform the terms and conditions of the contract it was subject to cancellation at the option of the permittee. The contract was made "subject to the approval of the Secretary of Interior and the right to assign by Stokes was made subject to the consent of the Secretary of the Interior if his consent was necessary." It was stipulated that the agreement and all its covenants inured to the benefit of the successors, heirs, and assigns of the parties respectively.

By various assignments these various operating agreements became the property of the plaintiff in this action. Stokes was the managing officer of the plaintiff corporation. In January, 1930, a contract was entered into between the plaintiff and the Capital Gas Corporation relating to these permits. It was a lengthy document, but it provided for the drilling of gas wells by the latter corporation on a large number of permits held by the plaintiff in this gas field, including the four involved in this suit, and called for the production and marketing of gas at a stipulated rate of compensation to the plaintiff. Pursuant to this agreement, during the summer of 1930, producing gas wells were drilled upon each of the four permits here involved. Sometime in 1931 the plaintiff herein asserted that the defendant Capital Gas Corporation had defaulted in its contract and commenced an action to cancel the same, which after trial resulted in a judgment, entered in November, 1932, canceling the Capital Gas Corporation contract and restoring the possession of the lands and the wells thereon to the plaintiff. This judgment was received in evidence in this case, and we are not further concerned with this defendant.

While the suit against the Capital Gas Corporation was pending, written notices of cancellation of the operating agreements were signed by their respective permittees, and likewise by John Wight. These notices of cancellation did not state any ground or reason for this action; they were not served until February 8, 1933. On February 20, 1931, the defendant Montana Eastern Pipe Line Company was organized and soon thereafter assignments of the permits in question were made to this defendant by the permittees and John Wight. As we gather from the record, John Wight was the managing officer of this corporation as well as of the Capital Gas Corporation. The offices of the Capital Gas Corporation and of the defendant Montana Eastern Pipe Line Company were maintained in the same rooms in the same office building, and the officers of each corporation were substantially the same. These officers had personal knowledge of the existence and terms of these operating agreements. The defendant Montana Eastern Pipe Line Company was not a party to the suit canceling the contracts of the defendant Capital Gas Corporation. The stockholders of the two corporations were apparently not identical.

Thereupon followed a controversy before the Department of the Interior which resulted in a lease or leases being issued to the defendant Montana Eastern Pipe Line Company to the lands described in these permits. The department declined to determine the controversy between these parties as to the validity of the operating agreements, and relegated the parties to the courts for adjudication of that question. These leases, as we understand the ruling of the Department, were issued subject to any rights plaintiff might be able to establish in the courts. This action has for its purpose the adjudication of these rights. The plaintiff company at one time or another held, under similar operating agreements, many thousands of acres of land on the same structure. The Secretary of the Interior had before him copies of these operating agreements prior to his decision. He did not expressly approve them, nor did he expressly disapprove them. So far as the record discloses, he did not recognize them.

The findings of the court are lengthy. By its conclusions of law it decided that the operating agreements were valid and effective, and legal, outstanding, and binding upon the defendants; that the defendant Montana Eastern Pipe Line Company took the assignment of the permits subject to the outstanding agreements and the rights of the plaintiff thereunder; that the lease or leases granted by the Secretary of the Interior to the Montana Eastern Pipe Line Company are subject to the operating agreements; and that the plaintiff, subject to the terms and conditions of these agreements, had the exclusive right to operate the lands and premises under the oil and gas lease without restriction from the defendants. By its further conclusions the court fully sustained these operating agreements and the right of the plaintiff to proceed thereunder. The judgment is in conformity with the findings of fact and conclusions of law.

Before proceeding to the...